FEATURE ARTICLE
Back in Business?
Is Development
Back on thEe
BY STEVE BERGSMAN
T
he United States’ recovery is now four years in the making
and the unemployment rate has fallen to 6.1 percent, the
lowest it’s been since 2008. Even the stock market is
looking good, closing above 17,000 for the first time.
However, not all pieces of the economic pie are looking salubrious.
Commercial real estate remains a bit of a laggard with national
office vacancies stagnant at 16.8 percent in the second quarter
and the industrial market growing in fits and starts.
Perhaps that is why developers and capital sources that bankroll
real estate development have been so conservative coming out of
the recession.
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PROFESSIONAL REPORT | FALL EDITION 2014
Initially, the path of commercial real estate in this recovery
has been all about tenancy. New office or industrial product
has depended upon the specific needs of a singular company
— basically build-to-suits. This is a phenomenon that is not
to be dismissed, if your market indicates the national and/or
local economy is far healthier than it might have been just 24
months prior.
The first builders to try the spec market are often local and
entrepreneurial, and if they hit that pot of gold which comes with
full occupancy, institutional developers follow.
Most cities didn’t start to see either office or industrial speculative
construction until last year, even when local vacancy rates dipped
far below 10 percent. There are still some cities in North America
where there is no speculative development, although build-tosuits have returned. The commercial real estate recovery has been
geographically erratic.
R
i
As always, Professional Report, checks in with SIOR
members in cities scattered across North America
to see what is happening at the local level, but first
we’ll peruse a tale of two cities, one a first-tier market
industrial powerhouse, and the other, a sleepier but
healthy second-tier city.
IT WAS THE BEST OF TIMES, IT WAS THE WORST OF
TIMES
The distance from Toronto, Canada to Tampa, Fla., is
just over 1,300 miles, or about 19 hours straight driving
— depending how desperate you are to get out of the
cold winter and arrive in the sunshine state.
Metaphysically, it’s a much greater difference; Toronto
is one of the powerhouse industrial markets in North
America, with 856 million square feet — it ranks
third in size on the continent. Tampa doesn’t even
rank number one in Florida. Yet, the two markets are
tracking closely, each within its range of size. Toronto
— a massive industrial market — moves forward like a
boulder rolling down hill and picking up speed. There
are no hills in Tampa so the rolling forward is more
modest, but in-line with its capacity.
e
?
s
contributing
SIORs
COLIN ALVES,
SIOR
MARY CLARE CODD,
SIOR
In Toronto, industrial development came to a halt
at the end of 2008, reports Colin Alves, SIOR, a
senior vice president with Colliers International
in Toronto, Canada. “We didn’t see any new
development until 2012 when the market started
to show signs of resurgence. Since then there
has been a fairly consistent pipeline of new
development with substantial growth over the last
12 months.”
Down in Florida, Mary Clare Codd, SIOR,
director of Office & Industrial Services in the
Tampa, Colliers International, similarly reports,
“we haven’t seen expansion here since 2007
or 2008, when projects were being finished. It
started again in 2013.”
ROBERT DIKMAN,
SIOR, ALC, CCIM, CRB
In Tampa, industrial vacancy has dropped below
10 percent; in Toronto the vacancy rate stands at
4.4 percent and could go as low as 4 percent by
the next quarter.
“We are starting to see the market come back,
both in build-to-suits and in spec because there
is no product,” observes Doug Murray, SIOR,
a vice president with Colliers Internatinal in the
Toronto suburb of Burlington, Canada. “On
e of t
SOCIETY OF INDUSTRIAL AND OFFICE REALTORS ®
WILLS ELLIMAN,
SIOR, CCIM, MCR
7
contributing
SIORs
“Secondly, the Toronto market has come back because
of organic growth from Canadian companies that are
expanding and need more space,” Murray adds.
In the submarket of Burlington, Murray worked
with a client that was looking for 120,000 square
feet with 28-foot clear and ESFR (early suppression,
fast release) sprinklers. The product didn’t exist,
so the client jump-started a 350,000 new industrial
build of which Murray’s client will take the 120,000
square feet.
TONY FLUHR,
SIOR, CCIM
SCOTT HENSLEY,
SIOR, CCIM
DOUG MURRAY,
SIOR
“Tampa-based BayCare Health System Inc. just moved
into a newly built
facility of 150,000
square feet and has
another build-to-suit
of 125,000 square feet
in Pinellas County,”
reports
Codd.
“Bristol-Meyers have
taken down 70,000
square feet to expand
to 100,000 square
feet, and Health Plan
Systems
recently
came to the market
and is expected to
add 99,000 more
square feet.”
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“The Orlando Corp. is no longer alone; starting in
January 2014 and going through the next 18 months,
the Toronto industrial market will see 9.5 million
square feet of new development,” says Alves.
How far has Toronto come back? According to
Alves, at the height of the boom in 2005 and 2006,
the market saw about 10 million square feet of
new development.
Commercial real estate
development has lagged
the economic recovery,
with many cities not seeing
post-recession, speculative
projects until 2012 or 2013.
In many cases, those early
entrepreneurial efforts have
proven wildly successful,
enticing other developers
back into the game.
However, all recoveries
aren’t equal, so the degree
of resurgence varies
dramatically.
To which Robert
Dikman,
SIOR,
ALC, CCIM, CRB,
chairman and CEO of
the Dikman Company
in Tampa, Fla., adds:
“With
inventory
slowly getting filled,
there is demand for
space. We will do two build-to-suits this year. The first
is 18,000 square feet of industrial with seven acres of
outside storage, and the other is a 32,000-square-foot,
special-purpose building with tons of parking.”
As for speculative development, here is where the
two cities diverge, and in a big way. Tampa is getting
its first spec building, 150,000 square feet, under
development by Cabot Properties, whereas Toronto’s
first spec building opened at the beginning of 2013;
it was such a success the market has since exploded.
JILL RASMUSSEN,
SIOR, CCIM
spec buildings underway in the Toronto market and
has pulled permits to erect three more buildings.
Since the recession, Canada’s largest privately-held
industrial real estate developer, Orlando Corporation,
has built the city’s first spec building in the Toronto
area with 500,000 square feet of space. It was leased
in full by Amazon. The company now has a number of
PROFESSIONAL REPORT | FALL EDITION 2014
ELSEWHERE IN NORTH
AMERICA
Louisville, Ky., which
sits in either the South or
Midwest — depending
on your point of view —
was one of those smaller
metros that did not
experience the real estate
boom after the turn of
the new century, nor the
bust that followed. None
of which prevented the
city from going through
a development dry period
after the onset of the Great
Recession — as the lack of
financing for new projects
was fairly universal across
North America.
Still, the equanimity of
the local commercial
real estate market made
Louisville attractive to
entrepreneurial firms that
understood the region. NTS Development Co. of
Lewisville, Kentucky, struck first, developing a
125,000-square-foot, state-of-the-art, spec office
building in 2010. The building attracted Churchill
Downs as an anchor tenant and by the time it was
completed it was 90 percent leased, and is fully
leased today, reports Tony Fluhr, SIOR, CCIM,
a director with NTS Development, Louisville, Ky.
The company is nearing completion on the second
spec office building, being developed in cooperation
with University of Louisville Foundation, in a 200acre, in-fill development. “The 125,000-squarefoot structure will open in the third quarter with
two tenants taking down 15,000 and 20,000
square feet,” says Fluhr. NTS Development is in
conversation with a few other potential tenants.
“There are two more spec office buildings waiting to break
ground,” says Fluhr. “On the industrial side, we have about 1.6
million square feet of new spec under construction. Recently,
Amazon leased about 1 million square feet in the nearby market
of Southern Indiana. That was a build-to-suit.”
Activity is due to the tightness of the market. According to Fluhr,
industrial vacancy is in the single digits and the office market of
20 million square feet, split between the suburbs and downtown,
stands at 14.7 percent vacancy.
Most companies prefer the suburban office market. “If you have
a 100,000-square-foot requirement in Louisville and you want to
be in the suburbs, that product doesn’t exist,” says Fluhr. “There
is pent-up demand so developers are able to put packages together
to do build-to-suits or spec projects.”
The suburbs are also key to the industrial market in Charlotte. The
overall industrial vacancy falls between 7 percent and 10 percent,
but in the key Mecklenburg County market, the vacancy rate is
6.8 percent, notes Scott Hensley, SIOR, CCIM, a principal with
Piedmont Properties/CORFAC International in Charlotte, N.C.
As with other cities, there was no new spec development since the
recession until recently. Now, the gloves are off–or on if you’re
talking about work gloves.
“There is about 2 million square feet of spec industrial space
coming out of the ground now,” says Hensley, “and in Cabarrus
County, north of Mecklenburg, 1.5 million square feet of new
spec development has broken ground since the second quarter
this year, all of it driven by market needs and infrastructure work
coming to completion.”
Why all the new building? Charlotte has seen excellent absorption
numbers, says Hensley with 1.5 million square feet being taken up
in the second quarter of 2013, followed by 1.9 million square feet
in the third quarter, 1.3 million square feet in the fourth quarter,
and almost 1 million square feet in the first quarter 2014.
Not all markets are experiencing the speculative glow. In
Wilmington, Del., Wills Elliman, SIOR, MCR, a partner with
Newmark Knight Frank Smith Mack, frankly declares, “no one is
doing anything spec,” but he adds, “based on user demand, buildto-suits are getting done.”
Despite the lack of spec building, Elliman has turned optimistic
on his market, because companies that have prevaricated on filling
out their location needs are finally active. He gives this example
of a 40,000-square-foot lease he negotiated for a build-to-suit.
“It was for a life science company in an outdated facility that
needed to get out for the last five years, but always kicked the
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can down the road,” he explains. “Now, the company is more
bullish on the economy and decided to go ahead and lease a
new building.”
Elliman is working another life science company lease, this time
for 60,000 square feet that will also be a build-to-suit. He also
negotiated a 175,000-square-foot lease in a build-to-suit for a
company called Corporation Service Co.
“We just finished two projects this year and we’re starting a
third,” says Rasmussen. “We try to do three a year.”
Not bad business for a market that Rasmussen says has “no office
development and no spec development.”
Some markets just behave differently.
“There’s a fairly high vacancy in this market, but Class A space is
getting tight,” Elliman says. “The companies now going to buildto-suits couldn’t find what was wanted.”
Finally, there are some markets that are just outliers and behave
differently than most others.
“In the Minneapolis metro, office and industrial leasing remains
slow,” says Jill Rasmussen, SIOR, CCIM, a principal in The
Davis Group of Minneapolis. “Development, however, is not
dead. There is one Minneapolis property sector that has been hot,
hot, hot – medical office buildings.”
“A few years ago we saw clinics going into retail space. Now we
are seeing larger projects, freestanding medical office buildings
with ambulatory surgery centers and a mix of primary and
specialty care facilities, going up nearer to where patients reside,”
Rasmussen explains.uare feet.
The sweet spot for these buildings is 40,000 to 50,000
square feet.
In the last four years, The Davis Group has built 12 of these
projects, from 35,000 to 62,000 square feet in North Dakota,
Idaho, but mostly in Minnesota. These are custom type buildings
with heavy duty power, lots of plumbing, gurney-size elevators
and most are build-to-suits with 15 to 20 year leases.
ABOUT THE AUTHOR: STEVE
BERGSMAN is a nationally
recognized financial and real
estate writer. For more than
twenty-five years, he has
contributed to a wide range of
magazines, newspapers and wire
services, including the New York
Times, the Wall Street Journal
Sunday, Global Finance, Executive
Decision, and Chief Executive.
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PROFESSIONAL REPORT | FALL EDITION 2014